During the discussion the panelists were asked about the ways taxpayers may correct tax mistakes after these two decisions of the Supreme Court.

In my remarks, I suggested taxpayers would be wise to review the revised requirements for rectification, and to consider the other remedies that may be available. I cited a list of potential remedies and, as a starting point, a selection of cases on these remedies:

The Supreme Court’s decision in Fairmont did not diminish or alter the other remedies that may be available to a taxpayer following an unintended tax result. I suggest that these other remedies may become more significant as taxpayers and their professional advisers determine how a particular tax mistake may be corrected following Fairmont and Jean Coutu.

On a procedural motion in 506913 N.B. Ltd. v. The Queen (2016 TCC 286), the Tax Court ordered the Respondent to answer all questions refused on discovery, reattend at a further discovery, and pay the Appellant’s costs on the motion.

The Tax Court also referred to the fictional interminable estate case of Jarndyce v. Jarndyce from Charles Dickens’ novel Bleak House in describing the slow progress of the litigation in 506913.

In 506913, the taxpayers filed their appeals in 2003 in respect of GST/HST for reporting periods in 1998 to 2000. The parties filed amended Notices of Appeal and Replies in 2010, and the Respondent was permitted to file further amended Replies in 2015.

Additionally, regular observers of the Tax Court will be interested to see the Court’s reference to Jarndyce:

[34]These are appeals that, in Dickensian language, drag their weary length before the Court. There have been several case management and motions judges involved in the more than thirteen years these appeals have been before this Court. A previous case management judge ordered that no further motions or other proceedings could be brought before the Court in these appeals prior to the hearing of the appeals. The Respondent’s motions to amend its replies were brought just before the deadline imposed on further motions. These appeals can be expected to proceed promptly to a hearing — and it would be best if the parties make that happen themselves.

The text of the first chapter of Bleak House states ” … but Jarndyce and Jarndyce still drags its weary length before the court, perennially hopeless.”

The only other reference in a Tax Court decision to Jarndyce that we’re aware of is found in the reasons of former Chief Justice Donald G.H. Bowman in Garber v. The Queen (2005 TCC 635) (see para. 6).

The Supreme Court confirmed that a general intention of tax neutrality does not permit the modification instruments in accordance with the Civil Code of Quebec.

In Jean-Coutu, the taxpayer brought a motion for rectification in the Superior Court of Quebec in order to modify certain documents for transactions that were undertaken to neutralize the effect of the fluctuations in foreign exchange rates. The transactions had achieved this goal, but such transactions had the unexpected and adverse effect of creating foreign accrual property income for one of the companies in the corporate group.

The taxpayer argued that the constant and clear intention of the parties to address the exchange rate fluctuation without generating adverse tax consequences was not reflected in the transaction documents.

The Quebec Superior Court allowed the taxpayer’s motion on the basis that the evidence showed there was discrepancy between the clear intention of the parties and the tax consequence of the transaction as executed.

The Quebec Court of Appeal allowed the Crown’s appeal and stated that the taxpayer’s general intent that its transactions be completed in a tax-neutral manner was insufficient to support a motion for rectification.

On appeal, the Supreme Court defined the issue as follows:

[14] This appeal raises the following key issue: Where parties agree to undertake one or several transactions with a general intention that tax consequences thereof be neutral, but where unintended and unforeseen tax consequences result, does art. 1425 C.C.Q. allow the written documents recording and implementing their agreement to be amended with retroactive effect to make them consistent with that intention of tax neutrality?

In its analysis, the Court applied and confirmed the guidelines it developed in Services Environnementaux AES Inc.

Pursuant to an exhaustive review of the provisions of the Civil Code of Quebec applicable to contracts, the Supreme Court reaffirmed that under the Quebec civil law the agrement or contract lies in the common intention of the parties. A contract is created by “an agreement of wills by which one or several persons obligate themselves to one or several other persons to perform a prestation” (see Article 1378 of the C.C.Q.), which prestation must be “possible and determinate or determinable” (see Article 1378 of the C.C.Q.), and must have a cause (see Article 1410 of the C.C.Q.) and an object (see Article 1412 of the C.C.Q.).

For the majority, Justice Wagner stated that, in light of these provisions of the Civil Code of Quebec, a court may not use the remedy offered by article 1425 C.C.Q. to modify a transactional scheme because it generated unforeseen adverse tax consequences. The Court stated:

[23] A taxpayer’s general intention of tax neutrality cannot form the object of a contract within the meaning of art. 1412 C.C.Q., because it is insufficiently precise. It entails no sufficiently precise agreed-on juridical operation. Nor can such a general intention in itself relate to prestations that are determinate or determinable within the meaning of art. 1373 C.C.Q. It says nothing about what one party is bound to do or not to do for the benefit of the other. Therefore, a general intention of tax neutrality, in the absence of a precise juridical operation and a determinate or determinable prestation or prestations, cannot give rise to a common intention that would form part of the original agreement (negotium) and serve as a basis for modifying the written documents expressing that agreement (instrumentum). As a result, art. 1425 C.C.Q. cannot be relied on to give effect to a general intention of tax neutrality where the writings recording the contracting parties’ common intention produce unintended and unforeseen tax consequences.

And specifying the applicable test developed in Services Environnementaux AES Inc., the Court stated:

[24] In my opinion, when unintended tax consequences result from a contract whose desired consequences, whether in whole or in part, are tax avoidance, deferral or minimization, amendments to the expression of the agreement in accordance with art. 1425 C.C.Q. can be available only under two conditions. First, if the unintended tax consequences were originally and specifically sought to be avoided, through sufficiently precise obligations which objects, the prestation to execute, are determinate or determinable; and second, when the obligations, if properly expressed and the corresponding prestations, if properly executed, would have succeeded in doing so. This is because contractual interpretation focuses on what the contracting parties actually agreed to do, not on what their motivations were in entering into an agreement or the consequences they intended it to have.

[31] In contrast, in the appeal here, the parties to the contract did not originally and specifically agree upon a juridical operation for the purpose of turning their general intention to neutralize tax consequences into a series of specific obligations and prestations. This general intention of the parties was not sufficiently precise to establish the details of a contemplated operation […] The determinate scenario agreed on by PJC Canada and PJC USA was drawn up properly, but because it was drawn up properly, it produced unintended and unforeseen tax consequences.

The Court dismissed the taxpayer’s appeal and affirmed the decision of the Quebec Court of Appeal.

In dissent, Justice Côté stated that the convergence of principles between the common law and the civil law as expressed by the majority in Jean Coutu was inconsistent with the contract law applicable in Quebec:

[91] […] I agree with my colleague that convergence between Quebec civil law and the common law of the other provinces is desirable from a tax policy perspective (para. 52). Indeed, in this Court, the parties agreed that the common law and the civil law are functionally similar with respect to the availability of rectification. But retreating from the interpretation of art. 1425 C.C.Q. adopted in AES in order to achieve harmony with this Court’s contraction of equitable discretion in Fairmont is inconsistent with the law of contract in Quebec.. […] Given that contracts can be expressed orally without recourse to written instruments, AES left open the possibility of rectifying errors in oral expression (paras. 28 and 32). This is consistent with the civil law principle, inherent in arts. 1378 and 1425 C.C.Q., that a contract is based on the common intention of the parties, not on the expression of that intention.

[92] The majority’s reasons in Fairmont are irreconcilable with these articles of the Code. Rectification in Canadian common law jurisdictions in now “limited to cases where the agreement between the parties was not correctly recorded in the instrument that became the final expression of their agreement” (Fairmont, at para. 3). There appears to be no scope for rectifying oral agreements. With respect, to the extent that my colleague in this case would import this limitation into the civil law, the “convergence” between the two legal systems is, in my opinion, far from “natural” (majority reasons, at para. 52).

The decision rendered by the Supreme Court in Jean Coutu is of significant importance as it restricts the circumstances in which taxpayers may rely on Article 1425 of the Civil Code to rectify transaction documents in tax cases.

Quebec tax professionals should carefully consider the additional guidelines provided in Jean Coutu in assessing whether or not a motion for rectification is available to correct mistakes resulting in unintended and unforeseen adverse tax consequences.

In a 7-2 decision in AG (Canada) v. Fairmont Hotels Inc.(2016 SCC 56), the Supreme Court of Canada has modified the common law test for rectification where the taxpayer has suffered an unintended and adverse tax result. The Court also clarified the standard of proof in respect of evidence of the parties’ intent on a rectification application.

A general intent to avoid or minimize tax is no longer sufficient to support an application for rectification.

In the companion case of Jean Coutu Group (PJC) Inc. v. AG (Canada), the Supreme Court reached a similar conclusion regarding tax intent and the modification of documents under the Quebec Civil Code (we shall follow-up with another post on this decision).

In Fairmont, the taxpayer brought an application to rectify certain share redemptions and to substitute a loan arrangement. The taxpayer argued that its intent at all times was to unwind some earlier loan arrangements on a tax-neutral basis.

The Ontario Superior Court of Justice (2014 ONSC 7302) cited Juliar et. al. v A.G. (Canada) (50 O.R. 3d 728) (Ont. C.A.) (Dentons was counsel to the successful taxpayers in Juliar) and other tax rectification cases. The Superior Court of Justice allowed the taxpayer’s application and unwound the impugned steps in the transaction and substituted the proper steps that accorded with the parties’ intention to avoid tax.

In the Supreme Court, the Crown argued that the result in Juliar conflicts with the Supreme Court’s decision in Performance Industries. The Crown urged the Court to import the requirements from Performance Industries to tax rectification cases.

In response, the taxpayer noted that Juliar (and most other tax rectification applications) are cases of mutual mistake, whereas Performance Industries was a case of unilateral mistake. Previous lower court decisions had rejected this attempt to import the Performance Industries requirements to tax rectifications. Further, the taxpayer noted the irony that the Crown was suggesting the result in Performance Industries should limit the availability of rectification when the Court’s decision in that case had in fact broadened the application of rectification as a remedy.

For the majority, Justice Brown stated that, under the new stricter test for tax rectification, a court may not modify an instrument merely because a party has discovered that its operation generates an adverse and unplanned tax liability. The Court stated:

[16] As I have recounted, both courts below considered the Court of Appeal’s decision in Juliar, coupled with the chambers judge’s findings, to be dispositive. In my respectful view, however, Juliar is irreconcilable with this Court’s jurisprudence and with the narrowly confined circumstances to which this Court has restricted the availability of rectification. …

[23] … Juliar does not account for this Court’s direction, in Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622, at para. 45, that a taxpayer should expect to be taxed “based on what it actually did, not based on what it could have done”. While this statement in Shell Canada was applied to support the proposition that a taxpayer should not be denied a sought-after fiscal objective merely because others had not availed themselves of the same advantage, it cuts the other way, too: taxpayers should not be judicially accorded a benefit based solely on what they would have done had they known better. …

[30] This Court’s statement in Performance Industries (at para. 31) that “[r]ectification is predicated on the existence of a prior oral contract whose terms are definite and ascertainable” is to the same effect. The point, again, is that rectification corrects the recording in an instrument of an agreement (here, to redeem shares). Rectification does not operate simply because an agreement failed to achieve an intended effect (here, tax neutrality) — irrespective of whether the intention to achieve that effect was “common” and “continuing”. …

On the standard of proof, the Court stated:

[36] In my view, the applicable standard of proof to be applied to evidence adduced in support of a grant of rectification is that which McDougall identifies as the standard generally applicable to all civil cases: the balance of probabilities. But this merely addresses the standard, and not the quality of evidence by which that standard is to be discharged. As the Court also said in McDougall (at para. 46), “evidence must always be sufficiently clear, convincing and cogent”. A party seeking rectification faces a difficult task in meeting this standard, because the evidence must satisfy a court that the true substance of its unilateral intention or agreement with another party was not accurately recorded in the instrument to which it nonetheless subscribed. A court will typically require evidence exhibiting a high degree of clarity, persuasiveness and cogency before substituting the terms of a written instrument with those said to form the party’s true, if only orally expressed, intended course of action.

In conclusion, the Court stated:

[38] To summarize, rectification is an equitable remedy designed to correct errors in the recording of terms in written legal instruments. Where the error is said to result from a mistake common to both or all parties to the agreement, rectification is available upon the court being satisfied that, on a balance of probabilities, there was a prior agreement whose terms are definite and ascertainable; that the agreement was still in effect at the time the instrument was executed; that the instrument fails to accurately record the agreement; and that the instrument, if rectified, would carry out the parties’ prior agreement.

The Court allowed the Crown’s appeal, with the result that the taxpayer’s application for rectification of the impugned transactions failed.

In dissent, Justice Abella stated that, in her view, there was no reason to impose a stricter standard in tax cases, and on the facts of the Fairmont case rectification should have been granted:

[71] It is true that a taxpayer should expect to be taxed based on what is actually done, not based on what could have been done (Shell Canada Ltd. v. Canada,[1999] 3 S.C.R. 622, at para. 45), but this principle does not deprive equity of a role where what a party or parties genuinely intended to do was transcribed or implemented incorrectly.

[72] On the other hand, parties should not be given carte blanche to exploit rectification for purposes of engaging in retroactive tax planning. Courts will not permit parties to undo decisions simply because they have come to regret them later. Allowing parties to rewrite documents and restructure their affairs based solely on a generalized and all-encompassing preference for paying lower taxes is not consistent with the equitable principles that inform rectification. …

[83] The requirements for rectification in the tax context articulated in AES are, in my respectful view, functionally equivalent to the test under the common law. Civil law and common law rectification in the tax context are clearly based on analogous principles, namely, that the true intention of the parties has primacy over errors in the transcription or implementation of that agreement, subject to a need for precision and the rights of third parties who detrimentally rely on the agreement.

[84] That means that there is no principled basis in either the common or civil law for a stricter standard in the tax context simply because it is the government which is positioned to benefit from a mistake. The tax department is not entitled to play “Gotcha” any more than any other third party who did not rely to its detriment on the mistake.

The implications of the Supreme Court’s decisions in Fairmont and Jean Coutu are far-reaching, as they significantly change the threshold requirements for granting rectification in tax cases.

The result in these cases also raises the issue of whether other equitable remedies (i.e., rescission, declaratory orders, etc.) may be available, and whether taxpayers may seek alternative remedies if the requirements for rectification may not be satisfied.

The broader impact of the Court’s decision in Fairmont is also unclear. Fairmont was a case in which the taxpayer sought to correct various documents relating to steps in a commercial transaction. How will the Fairmont principles in respect of intent in the commercial context impact rectification applications in respect of wills and trusts?

Tax professionals should consider this new test for tax rectifications to determine the appropriate manner for correcting mistakes that result in unintended and adverse tax consequences.

“I welcome the Offshore Compliance Advisory Committee’s first report and wish to thank the committee for its unique insight and for providing its invaluable experience to help improve the tax system for the benefit of hard-working middle class Canadians.”

“Our government has made it a priority to make the tax system fairer for middle class Canadians and to crack down on those who cheat and who do not pay their share. That is why we created the Offshore Compliance Advisory Committee – to advise us on the best ways to improve our tax system. We will continue with our efforts to crack down on tax cheats. My message is clear: the trap is closing.”

Under the federal Income Tax Act, the Canada Revenue Agency must consider a taxpayer’s objection and must vacate, confirm or vary the underlying tax assessment. This review must be completed “with all due dispatch”.

Unfortunately, no specific timeline is required for the CRA’s review of an objection (unlike the many specific deadlines imposed on taxpayers pursuant to the Income Tax Act or otherwise). Generally, a taxpayer’s only recourse in a case of excessive delay is to request interest relief or make a service complaint to the Office of the Taxpayer’s Ombudsman. The CRA has stated that it is aware of these potential delays, and has implemented service standards in respect of the various types of objections it receives each year

We concluded that the Canada Revenue Agency did not process income tax objections in a timely manner.

Although the Agency had developed and reported performance indicators for the objection process, the indicators were incomplete and inaccurate. Specifically, there was no indicator or target for the time that taxpayers should wait for decisions on their objections.

In addition, the Agency did not adequately analyze or review decisions on income tax objections and appeals, and there was insufficient sharing of the results of these objection and court decisions within the Agency.

This issue is very well-known to many Canadians (and their professional tax advisors) who have filed and pursued objections, and it is not surprising when you consider the CRA currently has an inventory of more than 171,000 objections in respect of personal and corporate income taxes totaling more than $18 billion.

Interestingly, the report notes that the amount of federal income tax dollars in dispute more than tripled from $6.2 billion in 2005-06 to $18.8 billion in 2013-14, and the amount in dispute has remained around $18 billion in 2014-15 and 2015-16.

The report recommends the following:

The CRA should provide timelines for resolving objections

The CRA should develop and implement an action plan with defined timelines and targets for reducing the inventory of objections

The CRA should review the objection process to identify and implement modifications to improve the timely resolutions of objections

The CRA should modify its performance indicators so that it may accurately measure and report on its performance

The CRA should review and share the results where objections are decided in favour of taxpayers in such a way that may improve the quality of audit results

Tax professionals who advise clients on judicial review of the CRA’s discretionary decisions should monitor developments in the standard of review in light of the Supreme Court of Canada’s decision in Wilson v Atomic Energy of Canada Ltd (2016 SCC 29).

In Wilson, the appellant was a non-unionized procurement specialist who worked for Atomic Energy of Canada Ltd. for four and a half years. He was dismissed in November 2009 and filed an unjust dismissal complaint under the Canada Labour Code. At issue was whether the significant severance package provided to Mr. Wilson rendered the dismissal just.

The labour adjudicator found that a severance payment did not exempt an employer from a determination with respect to whether a dismissal was just. Applying a standard of review of reasonableness, the application judge reversed the decision of the labour adjudicator, finding that the Code permitted the dismissal of non-unionized employees without cause. The Federal Court of Appeal agreed, but held that the appropriate standard of review was one of correctness.

The Supreme Court of Canada allowed the appeal and restored the decision of the labour adjudicator. The Court split 5-3 and issued several sets of reasons in its decision.

On the merits, Justice Abella wrote for the Court that the standard of review with respect to a labour arbitrator was one of reasonableness, to be assessed in the specific context under review. In this case, Justice Abella found the interpretation of the labour adjudicator was reasonable. However, Justice Abella remarked – albeit in obiter – that the line between reasonableness and correctness had begun to blur in the case law. A single standard of reasonableness, she stated, would operate to both protect deference and give effect to one correct answer where the rule of law required it. This would give effect to the different gradations of deference to be given to administrative decision makers in different contexts.

Chief Justice McLachlin and Justices Karakatsanis, Wagner and Gascon concurred with Justice Abella’s reasons and expressed appreciation for her attempt to galvanize constructive conversation about the standard of review. However, they declined to recast the standard of review. Justice Cromwell also concurred in the result, but rejected Justice Abella’s attempt to define a new framework, finding that the correctness/reasonableness distinction that emerged in Dunsmuir was still appropriate.

Justices Cote, Brown and Moldaver dissented. Agreeing with the Federal Court of Appeal, they stated that a standard of correctness applied and that the contradictions inherent in a growing body of labour decisions called for judicial clarity. Specifically, they held that “where there is lingering disagreement on a matter of statutory interpretation between administrative decision-makers, and where it is clear that the legislature could only have intended the statute to bear one meaning, correctness review is appropriate”.

What does Wilson mean for tax litigators? First, even though four members of the Court declined to overhaul the Dunsmuir framework, they lauded Justice Abella’s attempt to refine this area of law. The views expressed in the reasons indicate that the Court may be willing to revisit and clarify Dunsmuir (which also contained three sets of reasons).

Second, to the extent that members of the Court wish to supplant the Dunsmuir test with a single standard of reasonableness (containing gradients of deference), attempts to challenge the CRA’s discretionary decisions could be met with increased difficulty in the future.

Launched as part of the Canada Revenue Agency’s (CRA) efforts to fight international tax evasion and aggressive tax avoidance, the new Offshore Tax Informant Program (OTIP) allows the CRA to make financial awards to individuals who provide information related to major international tax non-compliance that leads to the collection of taxes owing …

… To be eligible under the OTIP, individuals must provide the CRA with specific and credible details of major international tax non-compliance that lead to additional taxes being assessed and collected. When program requirements are met, the CRA may enter into a contract with the individual that could lead to an award if the potential additional assessment of federal tax, excluding interest and penalties, is more than $100,000.

Any individual, no matter where they are in the world, is eligible to participate as an informant, subject to certain limitations …

At a recent STEP conference roundtable, the CRA stated that, from January 2014 to April 2016, the CRA had received 2,984 calls (812 of which were from potential informants) and 333 written submissions. The CRA also said that it has entered into over a dozen contracts with informants.

The CRA’s report on the volume of OTIP calls and the recent media focus on the Panama Papers are reminders for any non-compliant Canadian taxpayers that they may wish to consider contacting a tax professional and using the Voluntary Disclosure Program to correct any non-compliance regarding offshore assets and/or unreported income.

The taxpayer, an individual, bought and imported vehicles using the dealer license of Coastal Collision, a local auto dealership. Both parties consulted their respective accountants, who advised the parties that Coastal Collision should collect and remit GST/HST on the auto sales.

Accordingly, in reporting periods from January 1, 2008 to June 30, 2010, Coastal Collision collected and remitted the GST/HST on all the vehicles sold in its arrangement with the taxpayer.

The CRA reassessed the taxpayer and Coastal Collision on the basis that the taxpayer was required to collect and remit GST/HST on the auto sales. The CRA reduced the GST/HST owed by Coastal Collision, and increased the taxpayer’s GST/HST owing to $46,650.84.

On October 27, 2011, the CRA refunded Coastal Collision’s overpayment, at which time the taxpayer paid a portion of his GST/HST owing, and paid the remaining amount on October 31, 2011.

The CRA assessed interest on the GST/HST assessed against the taxpayer.

The taxpayer made an application for interest relief in which he asked for cancellation of all interest accrued since 2008 except for the modest interest accrued from October 27 to 31, 2011, the period after the CRA refunded Coastal Collision and before the taxpayer had paid the full amount owing.

Under subsection 281.1(1) of the Excise Tax Act (see also subsection 220(3.1) of the Income Tax Act), the CRA may waive or cancel interest and penalties that have been assessed against a taxpayer. The CRA has published guidelines that describe the circumstances in which the CRA may grant relief (i.e., natural disasters, illness, emotional/mental distress, CRA delay, inability to pay/financial hardship, etc.) and certain factors to be considered on each application (i.e., taxpayer’s history of compliance, existence of unpaid balance, actions taken to remedy the omission, existence of reasonable care/diligence by taxpayer, etc.) (see the CRA’s guidelines here and here).

In Gordon, the CRA had denied the taxpayer’s request for interest relief on the basis that a “wash transaction” existed in this case (i.e., the GST/HST was collected and remitted by the wrong entity within a closely related group of commercial entities or associated persons), and the provisions of GST/HST Memorandum 16.3.1 “Reduction of Penalty and Interest in Wash Transaction Situations” allowed the waiver/cancellation of only that interest in excess of 4 percent.

On the application for judicial review in the Federal Court, the taxpayer argued that it was unfair to charge interest on payments that were at all times in the possession of the CRA, and the CRA had erred in refusing to grant relief. The Crown argued that the CRA had made no reviewable error in the decision, and moreover the decision was reasonable.

In this case, the Federal Court noted the CRA had treated Memorandum 16.3.1 as binding, and as such the Minister had fettered her discretion. The CRA had failed to give any consideration to the taxpayer’s individual circumstances, including his history of compliance, the fact that GST/HST had been remitted promptly, and the error was not the result of any negligence on the taxpayer’s part (in fact, he had relied on professional advice).

The Federal Court granted the taxpayer’s application for judicial review, set aside the CRA’s decision, and returned the matter to the CRA for redetermination in accordance with the Court’s reasons.

The Gordon case is another reminder from the courts that the CRA’s administrative guidelines, while providing “consistency, transparency and fairness in the decision-making process”, are advisory only and the CRA may not rely on such guidelines in a manner that limits the discretion conferred under the statute.

Taxpayers who encounter such a response from the CRA on an application for interest relief may wish to remind the CRA of this important principle, as it has been the subject of several cases in recent years, and the courts have been clear about the role of such guidelines in the decision-making process.